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THE NEW YORKER, FEBRUARY 4, 2013
The opposition often invoked what s
known as the "moral-hazard argument":
if you reward people for risky behavior---
like buying the dubious loans you sold
them---they ll just do it more. Last sum-
mer, Edward DeMarco, Fannie Mae
and Freddie Mac s regulator, scuppered
the White House s plan to write down
principal for half a million homeowners
who d fallen behind on payments, listing
among his reasons that it would encour-
age others to stop paying. It was an argu-
ment of principle over principal: DeMar-
co s own analysis showed that the White
House plan could save $3.6 billion.
Similarly, the lobbyists who arrived in
San Bernardino didn t seem to believe
that anyone might have bought an over-
priced home simply because those were
the only homes available. Timothy Cam-
eron, a SIFMA managing director, says,
"We told Greg Devereaux, Drill down
and look at who these people are---did
they take out a second loan that got them
underwater? Did they put in a pool? "
Devereaux, his dander up, says, "I didn t
hear that same level of concern from
these sectors when G.M. or Bank of
America got bailed out. And I guess
none of those people had expensive cars
sitting in their driveways or took interna-
tional vacations!"
When a group of bankers and bond
managers met with Devereaux in Au-
gust, they proposed an alternate solu-
tion: San Bernardino should have "self-
help" days to educate homeowners, and
it should tap the Hardest Hit fund, a
federal kitty of $7.6 billion allotted to
the eighteen states most
affected by the crisis. But a
loan servicer would need the
investors to approve any loan
modifications under the pro-
gram---the nearly insuperable
obstacle with P.L.S. loans---
and the funds are intended
for only the most desperate
cases, which leaves out the
majority of responsible home-
owners. Vince Fiorillo, the president of
the board of the Association of Mortgage
Investors and the organizer of the August
meeting, acknowledges, "Servicers aren t
going to write down principal for the guy
who bought a four-hundred-thousand-
dollar house and is underwater but hasn t
lost his job. The only two ways for him
to fix the problem are (1) sell the house
and write a check"---to make up the
difference still owed the bondholders---
"and (2) call his servicer and say, Let s do
a cash-for-keys trade. " That is, try to
wangle a few thousand dollars in ex-
change for vacating his house.
The battle over the wisdom of emi-
nent domain ultimately turns on how
you perceive a house. Is it a home, hal-
lowed ground for the tooth fairy and for
neighbors who assemble for Fourth of
July potlucks, the keystone of a well-or-
dered, tax-paying society---or is it merely
a commodity with aluminum siding?
Wall Street s argument is that those who
took out patently gimcrack mortgages
bought the subprime narrative, in which
a home wasn t a primary residence but
a primary investment. So why should
those investors and M.R.P. s investors
benefit at the expense of Pimco s? Partic-
ularly when Pimco represents the stake-
holders in America s pension funds: the
family next door to the family with the
P.L.S. mortgage?
The difficulty with finding a satisfy-
ing scapegoat in the mortgage crisis is
that people don t just own their own
homes anymore; they also own slices of
lots of other people s homes. It might
seem that this would knit a nation to-
gether, but in practice it does just the
opposite.
By the time Gluckstern visited the San
Bernardino area, last fall, he was a
marked man. One afternoon, the Cali-
fornia Association of Realtors hosted a
panel discussion at the Marriott hotel in
Anaheim, where many of the
two hundred Realtors pres-
ent lined up at the mike to
pillory him. Gluckstern was
told, "Who are you to pick
winners and losers?," and
warned that borrowers whose
mortgages were seized would
take a huge hit to their credit
rating, and urged to let the
crisis take its natural course,
and accused of "cherry-picking" the best
loans simply to make a profit. One man
sputtered in wordless fury and finally just
yelled, "This thing stinks!" Applause
rolled through the room.
After Gluckstern presented his
plan---interrupted periodically by the
pealing of his ringtone, "What a Fool
Believes"---his interlocutor on the panel,
Richard A. Dorfman, a managing direc-
tor at SIFMA, declared that the proposal
was unconstitutional, that it would "blow
up the bridge" between "America and
vast trillions of dollars from around the
world," and that it would destroy the se-
curitization market (a market already on
life support). Soon, he predicted, M.R.P.
would expand its avaricious reach to
loans backed by banks and by the gov-
ernment. It "will treat the mortgages of
America" like someone "going into Wal-
mart and saying, I want this one and this
one and this one! "
Gluckstern finally glared at Dorfman
and asked, "If eminent domain is not the
solution, then what is?"
"That has absolutely nothing to do
with the use of eminent domain."
"There s the answer!" Gluckstern
cried. "They don t have a solution!"
Afterward, the crowd gathered around
Dorfman. When one Realtor observed,
"He s just stealing from you to give to
them," Dorfman nodded funereally. "I
have the terrible feeling," he said, "that
this is a man who walks through the ter-
minal ward, selling a medicine he knows
is worthless."
When Gluckstern dropped by Greg
Devereaux s office, the county C.E.O.
ruefully acknowledged that the opposi-
tion had gummed up M.R.P. s plans.
The joint-powers authority postponed
a meeting on the mortgage issue from
October to late January, and it seemed
increasingly possible that it would even-
tually just stand down. "We think the
idea is functionally dead in San Ber-
nardino," Scott Simon, of Pimco, told
me. "I feel bad for Devereaux. If you re
drowning, and somebody throws you
a toilet, you re going to grab it, but it
won t help you."
Without quite conceding in San
Bernardino, Gluckstern began stealth-
ier campaigns, in Michigan, Maryland,
and southern Florida, and established a
"local solutions" Web site that down-
played eminent domain and didn t men-
tion M.R.P. at all. Meanwhile, M.R.P.
began offering to work for free with cit-
ies to help them choose from a menu of
mortgage-repair options, including but
not limited to eminent domain. In an
acknowledgment that the new strat-
egy would be costlier and more time-
consuming, the firm also began raising
another one to two million dollars.